Delaware Versus Nevada: What Are the Critical Distinctions in Nevada Corporate and LLC Law?

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Nevada and Delaware are often considered to be desirable destinations for businesses choosing to incorporate outside their home state, primarily due to their friendly taxation and litigation laws. However, there are a number of key distinctions between Delaware and Nevada in corporate law that business owners and corporate counsel should be aware of. Ignoring the differences and simply treating Nevada as the “Delaware of the West” can lead to headaches down the road, especially if you’re doing business in Nevada.

What are the key differences between Nevada and Delaware corporate law?

One of the first
distinctions between Delaware and Nevada is what their corporate code is
called. In Delaware, it’s the General Corporation Law. Nevada is not so easy,
for them, it’s the Nevada Revised Statute with chapters and subchapters, often referred
to as the NRS plus the corresponding chapters.

Beyond the name, there are several other differences that litigators and business owners should be aware of.

Directors and officers: fiduciary duties and the business judgment rule

Fiduciary duties in
Nevada are codified in statutes and so is the business judgment rule. In fact,
the business judgment rule is codified as a legal presumption in the same
statute, which is NRS 78.138. In Nevada, as a matter of law, directors and
officers are presumed to act in good faith, on an informed basis, with the
interests of the corporation at the forefront. In performing their duties,
directors and officers can rely on financial statements, financial data
presented by directors, officers, and others who are reasonably believed to be
reliable and competent.

In Nevada, another
distinguishing factor is that it is a constituency jurisdiction. In exercising
their powers, directors and officers may—but are not required to—consider the
effect of a decision on several constituencies in addition to the stockholders.
That would include the corporation’s employees, suppliers, creditors, long- and
short-term interests of the corporation and its stockholders. Just to
underscore this, the NRS specifically states that directors and officers are
not required to consider the effects of a proposed corporate action upon any
constituent as a dominant factor, so they can weigh those factors as they see
fit. In Nevada, it’s not always about maximizing stockholder value.

Under Nevada law, the
limitations on personal liability are applied both to directors and officers
and neither a director nor an officer is individually liable to the corporation,
its stockholders, or to creditors for damages for a failure to act unless it is
proven that their act constituted a breach of their fiduciary duties and the
breach involved either intentional misconduct, fraud, or a knowing violation of
law.

Also, unlike in
Delaware, the Nevada statutes do not expressly preclude a corporation from
limiting liability for a director’s breach of the duty of loyalty or for any
transaction from which a director derived an improper personal benefit.

As it relates to the distribution to stockholders, the Nevada law is a little different since Delaware focuses more on surplus and net profits. Nevada provides that no distribution may be made if, after giving it effect, the corporation wouldn’t be able to pay its debts as they come due in the usual course of business, or total assets would be less than total liabilities, plus whatever would be necessary to satisfy the preferential rights of preferred stockholders. So, there’s an insolvency test and a balance sheet test. Directors can consider financial statements that are reasonable in the circumstances and other factors in determining whether they pass those tests but those tests need to be passed.

Fiduciary duties in the change-of-control context

Something else to be
aware of is that even in the change-of-control context or a potential change of
control, which would include a defensive posture situation, the business
judgment rule applies and the fiduciary duties are the same. There is no
heightened standard. The directors have the same fiduciary duties and are
entitled to the same presumption of the business judgment rule.

There is one exception
that’s very narrow and is laid out with specificity in the statute. There is a
precondition to the application of the presumption of the business judgment
rule if the directors or officers take action to impede the ability of
stockholders to vote for or remove directors. The statute then goes on to say,
“Here’s what we don’t mean by impeding stockholders.” For example,
the time of the meeting and vote, and a poison pill do not count as impeding.

As a result, the general rule is that even in the change-of-control situation, including a sale of the company, or hostile takeover, the baseline rule of business judgment rule applies. There is no heightened standard or precondition to the application of the business judgment rule.

Stockholders: voting and inspection rights

Stakeholder voting and
inspection rights are another area where Nevada and Delaware often diverge. Specifically
with regards to election rights, there are a few things to note:

Director
election: In Nevada, directors
are allowed to buy a plurality of votes unless you provide otherwise in your
articles or bylaws. This is less common, but you can have more than a plurality
of votes cast. Additionally, the NRS permits classification of boards and
staggered boards. In Nevada, it’s four classes as opposed to Delaware’s three.

Removal
of directors: Removal of
directors in Nevada is a little different then Delaware and other states. In
Nevada, it takes two-thirds of the voting power of the issued now-standing
stock entitled to vote to remove a director from office. Nevada law also does
not make a distinction between removal for cause or removal without cause.

Stockholder
meetings: Unless the articles or
bylaws provide for a different proportion of the voting power, a quorum or
majority of the voting power is required. That includes those who are present
in person or by proxy, and that’s regardless of whether proxy has authority to
vote on all matters.

Voting standards: The default voting standard for stockholder
action in Nevada, except again in the election of directors, which is a
plurality, is more votes cast in favor of the action or the proposal than votes
cast in opposition.

Inspection is another
distinction with Delaware, as stockholder inspection rights under Nevada law
are more limited than in Delaware. There are two statutes to be aware of, one
relating to governing documents and stock ledgers, and the other to books and
records.

Governing documents: In Nevada, a stockholder of record for at least six months before the demand, holding at least five percent of the outstanding shares or with written authorized by the holders of five percent, may inspect articles and all amendments, bylaws and all amendments, and the stock ledger or duplicate stock ledger that shows limited information, such as names, places of residence, and number of shares.

Books and records rule: In Nevada, a stockholder who owns at least 15% of the issued and outstanding shares or has been authorized by 15% can inspect books of account and financial records, make copies, and audit them. As in Delaware, that request can be denied to any stockholder who doesn’t furnish an affidavit that says the request is for a purpose related to stockholder duties.

However, these requirements do not apply to a corporation that furnishes detailed annual financial statements or has filed during the last 12 months all reports required under Section 13 or Section 15 via the Securities Exchange Act of 1934. So, if you’re a public company, these requirements don’t apply to you.

Anti-takeover statutes

There are some key
distinctions between anti-takeover statutes in Delaware and Nevada. Nevada has
a control share law. Unlike Delaware, Nevada law is modeled after the Indiana
statute, which puts limitations on voting rights for certain stockholders who
make public market acquisitions of shares over certain thresholds, such as a
one-fifth or one-third majority. The statutes very rarely apply, however,
because there are a number of hurdles to applying the statues including the
need for 200 record stockholders, requiring 100 or more to have a Nevada
address, and then the requirement of doing business in Nevada directly or
through an affiliate corporation.

Those three hurdles funnel down the potential of a takeover to a small group of companies. If you do find yourself in a takeover scenario, you can opt out of the statutes in your articles or bylaws, or with respect to a particular stockholder or a particular transaction.

Corporate litigation in Nevada

There are several
nuances when it comes to corporate litigation. The first is the structure of
the courts. Nevada judges are elected, including the Supreme Court. Any other
distinction with Delaware is that Nevada does permit jury trials in corporate
law cases. Until recently, Nevada had no appellate court but now has a Court of
Appeals, in addition to the Supreme Court.

District courts can hear
corporate law cases in Nevada, but there are business courts in both Washoe
County (Reno) and Clark County (Las Vegas), and there’s statutory procedure for
transferring cases between counties to get your case in front of the business
court judge.

Another thing to note is,
there’s not a lot of Nevada-specific case law. There are very few Nevada
Supreme Court cases directly interpreting the different statutes highlighted.
As a result, it’s important you always look at the statutes first and use that
as your primary reference.

With the lack of Nevada-specific
case law, many practitioners who come from out of state think you can just
apply other states’ precedents and corporate case law here. For example, while
Delaware case law may be persuasive in the absence of Nevada statutes and
precedent on an issue of corporate law, it doesn’t take the place of clear
guidance from Nevada courts and statutes. So, if Nevada statutes directly
address an issue or Nevada case law does, Delaware case law isn’t going to
apply.

Overall, the most
important thing to remember is—do not assume that Delaware law controls a
Nevada entity. In some instances, that can be moderately problematic. In other cases,
it can result in personal liability for your directors, or mean your deal is
prohibited for four years—representing a profound impact. It can even impact
how deals are negotiated and how boards of directors conduct their affairs,
make decisions, and proceed with the company’s business. So, when in doubt,
call or look it up. Don’t assume that Delaware is the rule of the road.

CSC can help you do business in any of the 50 states, including Nevada or Delaware. Learn more about all of our business solutions here.